Don’t Focus on Companies with Too Much Inventory when This Is What You Need to Watch

[TradeSmith Daily]( Editor’s Note: What’s the truth about what’s going on in the stock market? Is the worst behind us? Will the stock market ever recover? Should you expect this gut-wrenching volatility for the rest of your life? [Here’s what you aren’t being told… as well as what you can do to protect and grow your money](. Don’t Focus on Companies with Too Much Inventory when This Is What You Need to Watch When I needed to buy a new pair of workout shoes, my preferred shopping experience would be spending 20 minutes on Amazon.com (AMZN), finding a pair I like, and having it arrive on my doorstep two days later. That’s what I prefer instead of paying an arm and a leg on gas to drive to the outlet mall, circle for a good spot, fight to get the attention of the understaffed retail employees, and hope that the store has what I’m looking for. My wife suggested we make the trip to the outlet mall so that I could try the shoes on first and maybe find a great deal. Against my better judgment, I agreed, but she had to bribe me with brunch. Still, I had to devise a plan before I went — get in and out of the Nike Inc. (NKE) factory outlet as fast as my old shoes would carry me. Not only did I find a great pair of shoes, but they were HALF OFF the regular price. Mission accomplished. What’s funny is that just days later, Nike reported disappointing quarterly financial results and the stock dropped 7% to an almost two-year low. The reason was shrinking profit margins due to bloated inventories. In other words, too many shoes in stock. I at least did my part with my purchase by reducing Nike’s inventory levels. But in all seriousness, this issue of too much inventory is happening across the country, and it’s gained the short-term attention of investors. Even Target Corp. (TGT) is reportedly giving refunds to customers without asking them to return the purchased merchandise. Here’s why… Consumer demand bounced back much stronger than anyone expected after the early days of the pandemic. So, companies caught off guard over-ordered inventory. But as consumption returned to normal levels, companies started to realize that they have too much stuff on hand. It will take time, but this is something that can be fixed. For example, Target projects that its margins will improve in the second half of the year as the inventory issues work themselves out. What’s going to be a more important issue for how a stock performs is inflation. RECOMMENDED LINK [Stock-Picking Legend Bails on Sabbatical to Warn Investors of “Great Flatline”]( In the latest edition of “Armchair Millionaire” — we brought on stock-picking legend Mike Burnick to discuss a [disturbing new investing trend he calls “The Great Flatline.”]( He says: “In 10 years stocks will be worth the SAME amount (if you’re lucky!) — but [these unusual investments]( could be up 1,000% or more.” To discover why Mike dragged himself out of sabbatical and onto this controversial new interview — [click here to watch it now (revealed FREE on-air: his #1 stock to buy now)](. Don’t Overlook These Inflation Levels Look, inflation is, by far, the biggest problem stocks have been dealing with all year. So, it makes sense that any easing of inflation pressures would be bullish for the market. And there is good reason to believe that’s already underway now. Shown above are inflation expectations based on the yield for five- and 10-year TIPS (Treasury Inflation-Protected Securities). The yield or interest paid on these securities is adjusted for inflation. So, today’s yield on TIPS that mature in five years is a real-time measure of inflation expectations five years from now. As you can see, the five-year TIPS peaked in March at 3.59% and have been on a steady downtrend since then. The recent low yield of 2.59% is down one full percentage point in just three months. Also, take a closer look at inflation itself. Sure, the “headline” rate of inflation, measured by the consumer price index (CPI), remains at multi-decade highs at 8.6%. But, take a closer look at the rate of change in monthly inflation readings shown in the chart below. This chart is sending the exact same message as TIPS. The pace of inflation is slowing. It’s still on the rise, but the growth rate of inflation is clearly losing upside momentum. The reason why this is happening is that the Federal Reserve has slammed the brakes on money supply growth in the U.S. economy. Runaway growth in the U.S. money supply during the pandemic, and for too long afterward, is what triggered accelerating inflation in the first place. Remember those stimulus checks? The Fed’s measure of M2 money supply (which includes cash, checking deposits, and easily-convertible near money) grew at a breakneck pace. As an example, M2 supply growth was 6.73% in December 2019 but reached 26.89% in January 2021. Naturally, inflation skyrocketed. But now the Fed is reining in all that easy money printing. RECOMMENDED LINK [Bezos, Zuckerberg, Cuban, and Gates are in, are you?]( A groundbreaking $30 trillion shock wave is taking the crypto world by storm... And all the smart money is moving ahead of [this]( upcoming shock. The world’s smartest billionaire investors like Jeff Bezos... Mark Zuckerberg... Mark Cuban... Bill Gates... are all moving their money as we speak. JP Morgan, the largest bank in the U.S., just made their move to prepare themselves for this upcoming shock – so did Wells Fargo and Goldman Sachs. But the real story is the tiny $2 crypto situated at the forefront of this $30 trillion wave. Forbes even went as far as saying that the tech behind this class of coins is going to change your life. [Click here to see the $2 coin leading the way]( What to Expect Next Don’t get me wrong. This process takes time. You’re talking about a $20 trillion U.S. economy, with trillions more in easy money that was sloshing around but is now being drained by the Fed. Inflation won’t vanish overnight, but it appears to have finally peaked. You will likely start to notice the ebb tide of inflation in the “official” CPI and PPI numbers during the second half of this year. First, the headline and/or “core” rate of inflation will get somewhat less bad. Second, year-over-year inflation comparisons will start easing. After all, inflation began to noticeably spike higher in late 2021. That’s because the monthly rate of inflation at that time was going up against very easy comparisons compared to 2020, when the pandemic caused disinflation. But starting in the second half of 2022, the monthly inflation numbers will be going up against much more difficult comparisons, being compared to higher inflation readings from the second half of 2021. And that means the upside in the rate of inflation is likely to ease. Slowly at first, but ease, nonetheless. Then the numbers will begin falling short of economists’ consensus estimates by a wider margin. At that point, the financial media will finally catch on to what is happening. And CNBC will tell you inflation has peaked. Of course, stock prices could already be significantly higher by that time. That’s because this is a forward-looking market, and the smart money is already starting to sniff out that inflation is easing. Once inflation begins to ease, the members of the Fed should quickly change their tune about higher rates. And that would be a big bonus for the stock market. Good investing, Mike Burnick Senior Analyst, TradeSmith Best of TradeSmith The chart below represents the best-performing open positions over the last two years, as recommended by our software. [Download now on the Apple Store]( [Get It On Google Play]( [866.385.2076](tel:+866-385-2076) | support@tradesmith.com ©TradeSmith, LLC. All Rights Reserved. You may not reproduce, modify, copy, sell, publish, distribute, display or otherwise use any portion of the content without the prior written consent of TradeSmith. TradeSmith is not registered as an investment adviser and operates under the publishers’ exemption of the Investment Advisers Act of 1940. 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